A Healthy Way to Boost Your Health-Care Returns

Generic-drug makers are growing more influential in the health-care industry.

Health-care investing used to be straightforward -- used to be. Just buy a basket of the largest pharmaceutical players and you could sleep well at night, knowing these firms were recession-proof and had a solid, enduring path to profitability, given the patent protection on their drug portfolios.

Unfortunately, that lazy approach officially petered out earlier this decade. Perusal of stock charts over the past five years is telling -- while the market, as measured by the S&P 500 index, returned in excess of 20%, Eli Lilly(NYSE:LLY) has fallen about 20%, while Pfizer(NYSE:PFE) and Merck(NYSE:MRK) are down more than 40%.

Blazing a new health-care trailA number of major European pharma providers have outperformed their U.S.-based rivals by diversifying their revenue bases. A focus on international markets has certainly helped, as has a growing focus on generics, which used to incur the wrath of companies spending billions of dollars to develop new drugs.

Novartis(NYSE:NVS) is credited with blazing a new health-care trail by mixing its branded business with the acquisition of German generic provider Hexal in 2005, while Sanofi-Aventis is currently looking to buy Czech-based Zentiva to bolster its generic business. And back here at home, in a stunning recent about-face, Pfizer agreed to cooperate with Indian generics firm Ranbaxy to squeeze a couple of months of exclusivity from its Lipitor cholesterol-drug franchise. Lipitor is one of the most successful patented drugs of all time.

The name of the game is ... genericsA recent Financial Times article pegged the current generics market at about $70 billion, which puts it at just more than 10% the size of the total market for patented drugs. But given the snowballing trend toward patent expirations, as well as the growing sophistication with which generics firms are bypassing patent protections, generic alternatives will only become more influential in the global market for medicine.

With that, here are some mostly pure-play generic opportunities for your health-care portfolio. Teva Pharmaceuticals(NASDAQ:TEVA) is the largest player, and is gearing up to increase its clout -- it just announced its intent to acquireMotley Fool Stock Advisor pick Barr Pharmaceuticals(NYSE:BRL) for a hefty premium. Mylan(NYSE:MYL) is another major player, and it’s in its own global acquisition mode, buying the generics arm of Germany's Merck AG and investing in Matrix Labs in India.

Company

Ticker

Market Cap (in billions)

P/E

Net Profit Margin

Teva Pharmaceuticals

TEVA

$35.8

20.5

20.7%

Par Pharmaceutical

PRX

$0.6

50.9

6.5%

Dr Reddy's Laboratory

RDY

$2.6

24.2

8.8%

Watson Pharmaceuticals

WPI

$3.1

20.9

5.6%

Barr Pharmaceuticals

BRL

$7.0

46.4

5.1%

Mylan

MYL

$4.0

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Information courtesy of Capital IQ. Profit margins are for last fiscal year.

Long-term looks goodEven the most stubborn and storied pharma providers have begun to embrace the move to generics. That's because the generics industry is growing fast, is consolidating even faster, and can be quite profitable. Teva is a case in point -- it has a goal of doubling sales and earnings by 2012 through organic growth and acquisitions, and it posts net profit margins close to 20% thanks to the sales of a few key branded products. Investors should take note -- it could be quite healthy for your portfolio over the long haul.